Summary of Observation/Trend
Context
For those not familiar with the Canadian mortgage market, there are few major differences about our (very broken) mortgage market, compared to other countries. Some distinctive properties include:
- Full re-course is standard (ie, bank can go after the borrower personally, in the case of default)
- Mandatory, state-backed, regulated, insurance on "high-ratio" mortgages (ie, low down-payments)
- Homes valued over $1M (A subjective, location-unaware, made up number that doesn't change with inflation) aren't eligible for the insurance.
- Stress tests on borrowers, which get used as a policy tool, changes willy nilly in subtle ways.
- Top bank "advertised rates", get aggregated and used as a benchmark for the stress test. This causes games to advertise one rate, but actually offer another rate as "specials".
- Mortgages have terms de-coupled from their amortization periods. The market has led to the popular choice being a 5-year term with a 25 or 30 year amortization. At least until 2023.
The above causes the following weird outcome:
- People buying a $999K home, with $150K down, get a 5.74% 5-year fixed + insurance.
- People buying a $1.001M home, with $400K down, pay a 5.94% 5-year fixed.
Higher risk loans are get cheaper rates. In a free market, this shouldn't be possible.
Problem
Over the long-haul, home prices rise. Which means the total float of homes below $1M-prices, shrinks.
The mix of insured to uninsured mortgages in 2017, was around 50-50. But now, the % of insured has shrank to below 26% - and dropping.
Question for Stackers
Is this a problem? Is it big enough to impact markets if these loans go bad? Or, if these loans go bad all at the same time, for some systemic reason, will the state end up bailing out the uninsured? Does the stress test mean that the pool of buyers is artificially manipulated to be smaller than it otherwise naturally would be? Any other thoughts?